So welcome, welcome, welcome, welcome to this revision session of SA505 External Confirmation. Sir, we discussed why the name of External Confirmation is 505. Sir, if 5 is written in the financial statement, if 5 is written in the financial statement, then we want to check whether or not 5 is in the conforming party's books. So External Confirmation is nothing but your audit evidence, which we get as a direct written response. Direct written response means that no oral response will be given.
And what does direct mean, sir? Direct means straight. Third party to auditor.
Straightly from third party to auditor. It shouldn't come in the middle of anyone's hand. Okay. Now this is from the third party to the auditor.
Now keep one thing in mind. Sir, it can be in paper form, electronic form or any other medium. It doesn't matter to us.
It should just come directly to the auditor from third party. Okay, sir. Now what are external confirmation procedures? It's a very simple thing. First of all, decide what to know.
What do you want to know from the third party you are taking request? So what is the information to be requested? Now see who to know.
Who is that? information to you. Meaning, you are selecting an appropriate conforming party.
Now, for the person you want to know, you have to design the request, you have to address to the manager of HDFC Bank. To the manager of HDFC Bank, you provide this information to our auditors, meaning, management will authorize it, then only the other party will inform the auditor. So, you need to design the confirmation request, and remember, it should be properly addressed. Plus, you have to tell the address of the auditor, where you will return the information.
And lastly, finally auditor will send the request. Okay, sir. And if the other party doesn't answer, then this will keep following up. This will keep following up. You have to understand this.
Okay, sir. Understood. Now, sir, we discussed some factors in this.
We discussed some factors in this. What are the factors to be considered whenever you are designing the confirmation request? So, I said it's a simple thing. First of all, you have to see layout and presentation. Layout and presentation, layout and presentation, along with that, we had to see, assertions being addressed.
Okay, sir? Now, our prior experience says, that risk of material misstatement can happen, can be a problem. So, we saw prior experience and ROMAM, what we did, we took authorization. We saw authorization somewhere, then we discussed about the method of communication, how we can send requests, etc. And finally, ability of the conforming party to conform, that what the other party would give us, this basic thing we had to understand.
Okay? Okay, sir? Now, sir, after this, we had read a topic, types of confirmation request. Very, very easy topic. There are two types of confirmation request, PCR and NCR.
What are PCR and NCR, sir? Positive confirmation request or negative. First, let's talk about positive. Positivity is the best.
This says when the conforming party will reply? In every case. Whether it agrees or disagrees with you.
Or you didn't write the information, you said, you give the information. Whatever the case is, it has to be replied to. We are not giving it any option.
So it has to reply in all the cases. Either you have written the information, then you said agree or disagree. Or you didn't write the information at all and you said to provide the information. Sir, because here every case has to get a reply, then it is a reliable.
It is a reliable audit evidence. Now, sir, what was the risk in this? Now it will be fun.
Now it will be fun. What was the risk in this? The risk is that if this is the first case, then they can agree or disagree without verifying. If this is the first case, then they can agree or disagree without verifying.
That means, other party can reply without verifying the information. So, sir, what is its solution? Second case.
You don't give him the information by writing it. You tell him to give me the information. That means, you can ask the conforming party to fill the information.
Now, what is the risk in this? Sir, his work will increase. Additional efforts will come on the poor person.
And additional efforts can lead to a lower response rate. Everyone say with me. Additional efforts can lead to a lower response rate due to these additional efforts.
Because of a blank request, there can be a lower response rate. Very good, very good, sir. Now, sir, after this, what is the problem with negative confirmation request?
Here, your party, the conforming party, will reply only when it disagrees. It will reply only when it disagrees. It will reply only if it disagrees with the information. Now, sir, we cannot trust this. It is considered to be a very less persuasive evidence.
Why? It can also be that he did not get confirmation. It can also be that he didn't get the confirmation.
Yes sir, it can also be that. So if you didn't get any reply, then don't believe that it is agreeing with the information. The information is correct, don't believe that it might not have been received.
So failure to receive the response doesn't mean the conforming party received the information. Neither it indicates that the information is correct. It also doesn't indicate that the information is verified.
Sir, why is it like this? Why is it verified like this? I said, let's assume that he got it. Let's assume that he got it, but he will reply only then.
When the information is not in his favor. For example, let's say he is your creditor. You said I have to give you 1000 rupees. You said I have to give you 1000 rupees.
In his books, case A, 500 rupees is written. So, will they reply and say that they don't want to take Rs.1000 from you, No sir, less chances. Secondly, if the reply is of Rs.1000, then there is no chance of getting a reply.
And if Rs.1500 is of Rs.1000, That means it is not in his favour. You are saying that I want to give Rs.1000, He says that no, I want to take Rs.1500. So, when the things are not in favour, then only the third party replies. If it is in his favour, then he doesn't even reply. So, keep in mind that the conforming party is more likely to respond when the information is not in their favour.
All the kids, say with me. All the kids tell me. Confirming party is more likely to respond when the information is not in their favor.
Now tell me those four conditions. If they are complete, then only we will use negative confirmation request. Please tell me in the chat box, those kids who are watching recorded, write on your register, all the four conditions right now. What are the four conditions if satisfied?
Then only you will use a negative confirmation request. Sir, this is a big one. Some good person has said, has said, two things are less, one is more.
Two things are less. One is, we have made a promise not to ignore too much. That means, sir, you will say, first of all, Romam has assessed less. And not only assessed less, but also checked. Not only Romam has assessed less, but also checked.
Sir, checked, checked. Meaning, we think that controls are effective. For this, we have sufficient and appropriate evidence. Yes or no? Yes, sir.
What was less? Exception rate is less. What did Shubham sir teach about exception? Exception means that the balance that is in the financial statements The balance that is in the financial statements and the balance that is in the confirmation These two are not matching If there is a difference between these two, then it is called exception So he is saying that the exception rate is also low So the ROMAM is also low, the exception rate is also low What is more?
There are more balances And they are not big, they are small, similar balances Ek jaise ko angreji mein bolte homogeneous. So large number of small small homogeneous balances and ignore nahi karne ka kiya hai wada matlab we are not aware about any factor. We are not aware about any factor that the conforming party will disregard the request.
To ye line ICI kaise likta hai that we are not aware. Auditor is not aware of any circumstance that the other party will disregard your request. You are getting the point or not?
Yes sir. Now if your question never has ICI written in it, that the confirmation has not been answered. If there is any question in which ICI has not been written, that the confirmation has not been answered, then you will write the other things that are relevant. With that, you will get the complete number of alternate procedures written. If you have a debtor's case, then how can debtors check?
Sir, we did sales. So whenever you do sales, there are shipping documents, sales invoices, and the money that comes from debtor is called subsequent cash receipts. Subsequent cash receipts, we can see all this. Okay sir. On the contrary, for a creditor, when goods come from a creditor, there are goods, receipts, notes, purchases, invoices, and when they pay him, he is called subsequent cash disbursement.
We call him subsequent cash disbursement, so that will also be checked by us. It was very easy, sir. Now we did a question. Now we did a question. Sir, what was in the question?
I said it was in the question. Understand carefully. We did a question in which we had a lot of creditors.
I think creditors and debtors. Who were those 25 people? 30 creditors.
30 creditors, sir. To send a request to 30 creditors, management agreed at once. To send a request to 30 creditors, management agreed at once. It didn't make any mistake. Plus, their response came within a week.
This situation is called too good to be true. And when my article checked whether those creditors actually exist or not, they didn't even exist. 30 out of 25 creditors have no name or sign, so their GST registration got cancelled.
This is called the topic of reliability of response. We are not doubting on reliability, so if we are doubting on reliability, there can be a risk of material misstatement due to fraud. Whenever there is fraud in the audit, then you have to modify the nature, timing, and extent of procedure.
So this is a basic thing. Now, where did reliability come from? In SA500.
Reliability was born in SA500, SA500 says that external sources are reliable, but there is a risk of someone catching them in the middle. Someone catches the evidence in the middle and makes a mess in it. They call it alteration. So, interception, alteration, fraud. There is a risk of interception, alteration, fraud.
Sir, when will we think of this? When two factors are present. When are two factors present? Either you think that you didn't get it directly from the conforming party, but it went to someone else in the middle. Indirectly.
Or the request you received, that came from other party. The intended party didn't reply, some other party replied, so you will say, it has come indirectly, or not from the intended party, and this is a fraud risk factor. This is a fraud risk factor.
So I say, in the beginning of the answer, and in the end of the answer. In the beginning of the answer, and in the end of the answer, you have to keep in mind, the fraud factor in both. Clear?
Clear, sir. Now, we learned one more thing. Tell me, what? Tell me what did you learn?
Sir, we learned one more thing that suppose suppose I have to send a request to a creditor and management says no and management tells me the whole story behind it so should I come back to a small kid after listening to the story or do I have to take evidence about the story? Sir, you have to take evidence about the story You have to take evidence about the story that if he is saying that there is a legal dispute going on and there will be an adverse impact on that legal dispute then you will take evidence from him Suppose there is a legal dispute about goods return. So check the goods return regarding documents.
Check the legal documents. So we call this Refusal by the management. Refusal by the management to allow the auditor to send request. So whenever the management will refuse, Don't listen to it, ask for the reason.
And take evidence regarding the reason. Again, what is there here? Here also there is a risk of material misstatement And it can be due to fraud. Its impact will also come on nature, timing, and extent of procedure.
Okay sir. This is the same thing. After that, at the end, we won't give up. If we can't perform the main procedure, we will perform some alternate procedure.
And along with alternate procedure, you have to be careful if you don't get evidence from that. If you don't get evidence from that or the reason of management seems unreasonable, then you will perform SA-260 and SA-705. What does SA-260 mean? SA-260 means communication with TCWG. Okay, sir.
And don't modify the opinion according to SA-705. You don't modify your opinion because it's not written anywhere. You have to consider the implications.
You just need to consider the implications as per SA705. Is the flow clear to you? Yes, sir.
Then we saw that the talk about external confirmation is done by two standards. Decide whether you want to send external confirmation or not. Decide whether you want to send external confirmation or not.
This is what SA330 tells you. But how to send it? SA505 tells what the procedures are regarding it. So first tell me which are the areas in which you can send external confirmation.
Sir, all the areas with balance sheet. Is there any bank, debtor or creditor? Okay, will you only confirm the balance with debtor and creditor or you can also decide their terms?
Sir, you can ask them the terms also. Okay sir. Apart from this, if anyone has the title deeds of your property, plant and equipment, then ask them.
If any inventory is with third party, then ask them. So you have to read these basic points first. And the last topic that we covered here was How to decide Which factors to consider and decide That whether to use external confirmation or not So go through the three step process First decide whether the other party knows or not If they know then only they will send So you need to decide whether the third party Has the knowledge of the matter or not Okay sir If they know then will they tell us Meaning the ability of the conforming party to respond I say they won't tell Let's go a little negative.
No sir, she won't tell. Why won't she tell? Because it has time and cost.
In which cost it goes? In legal liability. So relate it with the next point, potential legal liability. In which time it goes? In converting the dollar into rupee.
That means they are dealing with a different currency. These 3-4 points you can keep in mind. And the first was, does she know?
Let's assume she knows. Will she tell us? Let's assume she will tell. But the third point is, can you believe in it? Does the third party has that objectivity?
So which party has less objectivity? How much is less? Whose response is less reliable.
I am not saying it is not reliable. It is just considered to be less reliable. Sir, it is a related party.
So, in the last, you have to keep in mind Objectivity of the conforming party. And in that also, in the example, Related party that is considered to be less reliable. 13 minutes 30 seconds.
13 minutes 30 seconds. We have revised the whole class in detail. This is called smart work. Okay. You just have to keep this smart work with you.
We have to take this forward. Just give me a second. Now I will show you a video.
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